Net Operating Income (NOI)

Net operating income is what a property earns from operations before anything related to financing, taxes, or capital improvements touches the number. Start with gross potential rent, subtract vacancy and credit loss, add other income like parking or laundry, and the result is effective gross income; subtract operating expenses — taxes, insurance, management, repairs, utilities — and what’s left is NOI. A property with $600,000 in gross rental income, $30,000 of vacancy loss, and $15,000 of other income has $585,000 of effective gross income; against $234,000 of operating expenses, that’s $351,000 of NOI. Debt service, depreciation, and capex reserves all come out of NOI, not before it.

NOI matters to a borrower because it is the raw material for both cap rate (value) and DSCR (loan size), and lenders rarely accept the NOI on a borrower’s own operating statement at face value. Underwriters typically impose a minimum management fee — often 4%–5% of effective gross income even for a self-managed property — and a per-unit capital reserve on multifamily deals regardless of what the borrower actually spends on capex, adjustments that can shave 5%–10% off a broker-marketed “pro forma” NOI before a lender ever quotes a rate. Borrowers shopping a deal on the strength of its NOI should ask each lender for its underwritten NOI, not assume the number on the offering memo survives underwriting intact.

Every cap rate, DSCR, and debt yield figure a lender in our coverage quotes is an NOI assumption in disguise, which is why we treat the observed lending terms as a record of underwriting posture rather than a promise about any specific property’s income.